USD remaining supported

Aside from the Euro, the USD is continuing to extend its gains against its main trading partners on Monday. This is occurring despite the announcement moments ago that personal spending declined more than forecast in January, which could also open up the possibility for another downward GDP revision if consumer spending refuses to pick up this month. Questions are being asked why, despite the consistently strong employment reports, we are yet to see this translate into actual consumer spending. Moreover, the economic release provides further reason for the Federal Reserve to delay raising interest rates until later this year because if it does hike rates earlier, consumers may spend even less.

Some might also ask why the USD is continuing to drive higher against its counterparts, with this basically being because of the complete divergence of monetary policy between the US Federal Reserve and everywhere else. After the People’s Bank of China (PBoC) eased monetary policy over the weekend, the divergence in sentiment between the United States and elsewhere has stood out even further to traders. At a time when so many central banks are shifting stance and unexpectedly easing monetary policy, optimism that the Federal Reserve will still be raising US interest rates at some point this year is enough to support the USD uptrend.

After the EURUSD dropped to its lowest valuation since late January at 1.1198 earlier in trading, the pair rebounded to 1.1240. The catalyst behind the move was due to some of the economic data released earlier, coming in stronger than expected. There was a pleasant surprise to the upside when the Eurozone unemployment rate fell to its lowest level in over two years, while there is also emerging optimism that a combination of the weaker currency and lower oil prices is supporting confidence in the Eurozone. Traders should be careful before expecting the Euro to recover last week’s losses because the economy is still caught between stagnant economic growth and dangerously low inflation levels, which ECB President, Mario Draghi, could reiterate in Cyprus this coming Thursday following the ECB’s interest rate decision.

The GBPUSD ignored further evidence that the UK economy has commenced the year on solid footing when the UK Manufacturing PMI was announced at a seven-month high, with the pair slipping from 1.5428 to 1.5372 regardless of the strong data. The Manufacturing PMI for February followed a hat-trick of PMIs in major sectors last month that showcased the UK economy was building positive signs of momentum for Q1. As mentioned before, the GBPUSD has recovered its sharp losses encountered in January and the pair’s chances of trading sideways, rather than extending any further are favoured moving forward.

After taking a heavy fall last week, the EURGBP found tentative support as expected around 0.7250 and has been able to build a modest recovery today. The pair bounced as high as 0.7299 following the surprise to the upside with the data from Europe, but the divergence in sentiment between Europe and the UK remains pretty significant and unchanged. From a technical standpoint, this pair looks very weak and sinking through the seven-year low at 0.7260 last week has opened the doors for an eventual downside move towards 0.70. It is going to take some time before the EU’s economic fortunes reverse, while the GBP suffering losses over the upcoming general election in May would provide the EURGBP bull’s the highest chances of regaining momentum in the longer term.

Due to US interest rate expectations being pushed back until the second half of the year, Gold has managed to climb to $1223. The US GDP being revised lower was expected to lead to a slight rebound for Gold, but traders will now be looking forward to Friday’s NFP. Further signs of improvement in the US labour market will likely reaffirm optimism that the Federal Reserve will be raising US interest rates this year, underpinning a longer-term bearish bias for metals.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

Follow Jameel on Twitter @Jameel_FXTM

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